Antitrust Law Daily Wrap Up, ADVERTISING—D. Colo.: General Steel may be liable for pay-per-click false advertising, (Sep 18, 2015)

By Jody Coultas, J.D.

General Steel Domestic Sales, LLC was denied, in part, summary judgment of Lanham Act false advertising counterclaims filed by competitor Ethan Daniel Chumley and Atlantic Building Systems, Inc. by the federal district court in Denver (General Steel Domestic Sales, LLC v. Chumley, September 15, 2015, Krieger, M.). There was a dispute as to whether General Steel could be held liable for pay-per-click advertising created by a third party, but claims seeking monetary damages were dismissed. The court also declined to dismiss false advertising claims filed by General Steel against the defendants.

After a brief employment with General Steel, Chumley formed competitor Atlantic Building to compete with General Steel in the market for prefabricated steel buildings. General Steel filed suit for false advertising under the Lanham Act, violation of the Anti-Cybersquatting Consumer Protection Act, and misappropriation of trade secrets claims. The defendants counterclaimed for false advertising and misappropriation of trademark and copyright.

General Steel’s motion. A genuine dispute of fact as to whether the company that published the allegedly false statements about the defendants was acting as an agent of General Steel, according to the court. The allegedly false “blog posts” and “pay-per-click” ads were not created by General Steel, but by an entity called JEMSU by which JEMSU performed “search engine optimization” designed to heighten General Steel’s ranking in Internet search engines. General Steel argued that JEMSU was not its agent, but rather was an independent contractor, as it did not attempt to control how JEMSU performed the creation and publication of the web content, nor that it had control over the material that was published. Although General Steel may not have dictated the day-to-day activities of JEMSU, General Steel retained the authority to direct the charge and there was evidence that General Steel gave specific directions to JEMSU as to the content. There was also a dispute as to whether General Steel granted JEMSU the authority to publish the false content. Therefore, summary judgment on the defendants’ Lanham Act false advertising counterclaims was denied.

General Steel argued that the false statements at issue could not constitute false advertising under the Lanham Act because the content that was published was never intended to be read by humans or to influence customers. Rather, the content was allegedly intended only to influence algorithms used by search engines. To constitute an actionable advertising or promotional campaign, a dissemination of information must reach some numerically-significant quantity of actual or potential customers of the parties’ products. It was clear that the materials were intended to appear as legitimate news articles, reports, or testimonials about General Steel and frequently contained praise for General Steel. The ultimate purpose of the testimonials was to influence the algorithms to reflect the quantity and quality of favorable comments for the benefit of the ultimate consumer. This was “promotional” information and could be “advertising” sufficient to support a Lanham Act claim. However, the content at issue did not reach a sufficient numbers of customers of steel buildings to be advertising. Therefore, General was entitled to summary judgment on the false advertising claims premised on the JEMSU “blog posts.”

The court found that General Steel reviewed and approved the text of the pay-per-click advertisements, allowing claims to proceed. General Steel, through JEMSU, purchased “pay-per-click” advertising from search providers that resulted in an ad for General Steel appearing along with search results. The ad read: “The #1 Steel Building Manufacturer! Call Toll Free: [phone number].” This ad was false because General Steel was not a steel building manufacturer.

General Steel advertised that it had a “customer service track record of zero unresolved customer issues since the company was established” and that “No other steel building company can compete with our company’s history of 100% customer satisfaction,” but General Steel had been the subject of numerous complaints to the Better Business Bureau and was sued by customers about 20 times. The claims were specific and measurable, and could be evaluated as true or false. Therefore, the claims were not mere puffery as argued by General Steel and summary judgment was not appropriate.

The court granted summary judgment to General Steel on the Lanham Act counterclaim for false advertising to the extent it sought money damages. The defendants conceded that they could not demonstrate any actual damages that could be traced to the false advertising, but sought to invoke a presumption of injury based on General Steel’s allegedly deliberate deceptiveness. The presumption applies only where the defendant has engaged in false advertising that expressly compares the defendant’s product to the plaintiff’s; “where a defendant is guilty of misrepresenting its own product without targeting any other specific product, it is erroneous to apply a rebuttable presumption of harm in favor of a competitor.” The advertising in question misrepresented only General Steel’s products.

Defendants’ motion. The court denied summary judgment on General Steel’s false advertising claim. Chumley registered the domain name steelbuildingcomplaints.com, which allegedly hosted defamatory information about General Steel. Hundreds or thousands of placeholder websites, which consist of links containing variations on the name “General Steel” that link back to steelbuildingcomplaints.com or to web pages belonging to the defendants, were created by Chumley. There was ample evidence that Chumley was the author of much of the content of the website, and a reasonable factfinder could infer that the various representations on the website that suggested the website was created “by consumers” or that it is intended to be a resource for consumers was false. The defendants’ argument that they could not be held liable for it because the statements were not “advertising or promotion” was rejected based on the defendants’ strong commercial interest in diverting customers away from General Steel and its specific reference to General Steel’s products in the website.

Armstrong argued that the false advertising claim was barred by the doctrine of res judicata, based on General Steel’s prior suit in 2010 against the defendants concerning their use of General Steel’s name as keywords when purchasing pay-per-click and other types of online advertising. Res judicata precludes litigation of issues that were actually decided or could have been decided in a prior action. The false advertising on steelbuildingcomplaints.com could not have been part of the same transaction, event, or occurrence that had been previously litigated. Those claims focused on the defendants’ boasting of false accomplishments on its own website and falsely appropriating General Steel’s name in pay-per-click advertisements.

The case is No. 13-cv-00769-MSK-KMT.

Attorneys: Adam Ross Bialek (Wilson Elser Moskowitz Edelman & Dicker, LLP) for General Steel Domestic Sales, LLC. Craig Ruvel May (Wheeler Trigg O'Donnell, LLP) for Ethan Daniel Chumley and Atlantic Building Systems, LLC.

Companies: General Steel Domestic Sales, LLC; Atlantic Building Systems, Inc.

Cases: Advertising ColoradoNews